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Litigation: a bill to settle

17 July 17

Following publication of the bill to implement civil litigation funding reform, the author critically examines the thinking behind two key provisions, and encourages practitioners to join the debate

by Andrew Lothian

In March of this year I set out, in a previous article, some comments on what was then known as the Expenses and Funding of Civil Litigation Bill (Journal, March 2017, 5). The bill has now been published, as the Civil Litigation (Expenses and Group Proceedings) (Scotland) Bill.

The explanatory notes to the bill state that it aims to increase access to justice in civil actions by:

making the costs of civil court action more predictable;

increasing funding options for pursuing civil actions; and

introducing a greater level of equality to the funding relationship between pursuers and defenders in personal injury actions.

This is in large part based on the hypothesis that in Scotland there are meritorious pursuers unable to fund their cases, whereas most defenders enjoy the benefit of insurance. One submission to the Taylor Review described this as “David v Goliath”.

As expected, the bill contains four main parts: (1) success fee agreements; (2) expenses in civil litigation; (3) auditors of court; and (4) group proceedings. The first two parts will, I suggest, have the greatest day-to-day impact on the conduct of claims and litigation in Scotland. While the other parts are of considerable importance, the comments in this article will be confined to parts 1 and 2.

DBAs: what controls?

Part 1 will, if the bill is enacted, allow a solicitor for the first time to enforce an agreement to take a percentage of a pursuer’s recovered damages as a fee in a successful litigation. This is known as “damages-based agreement” or DBA. It, of course, violatesthe longstanding rule against agreements pactum de quota litis, which would no longer have effect. As a matter of principle many of us will instinctively be concerned about solicitors having a personal financial stake in the value of their client’s case, and the risk of conflicts among the duty to the court, the duty to the client, and the solicitor’s own interests.

The Scottish Government believes there are benefits to this proposal. At present, unregulated entities such as claims management companies are free to take a percentage of a client’s damages. At first glance, it would seem perverse that an unregulated entity is free to enforce even the most burdensome agreement against a client, whereas the heavily-regulated officer of the court is not entitled to charge a client any percentage of damages. The authors of the bill state, in the accompanying policy memorandum, that DBAs “might enable the legal services market to expand” and will open up “a wider choice of funding options”, which will “increase access to justice for pursuers of civil litigation”. Society will presumably benefit if a regulated profession can take market share from an unregulated one.

However, and as we all know, the Scottish jurisdiction is not large. Only a handful of firms have pursuer litigation as a core part of their business. It is unlikely that the market alone will provide sufficient entities to ensure that the percentage that solicitors will deduct from damages remains competitive. In response to this criticism, the bill gives the Scottish Government the power to set a cap on the proportion of damages which the solicitor can take. In order to ensure a fair deal for pursuers, in a small market, it is, I suggest, essential that this power is used and the cap is set at the right level, otherwise pursuers will not receive the damages they are entitled to.

Future losses?

In the most serious cases, damages for future losses (including care, accommodation and equipment) are carefully calculated to ensure that pursuers have the help they need for the rest of their life. In catastrophic injury cases, these heads of claim can be worth millions of pounds. To deduct a broad percentage of a multi-million pound future loss claim will deprive the most injured pursuers of the care they need. As matters stand, in the most complex or high-value cases, solicitors can already apply to the court for an additional fee from the defenders.

One suggestion was to exclude future losses from the DBA calculation. However, it was thought that ring-fencing future losses in this way might create an incentive for a solicitor to delay settling cases so a greater proportion of the damages falls into the past. It is unclear why this concern received attention, whereas more fundamental concerns regarding conflict of interest or the risk of claims being overvalued did not. In any event, the cash flow requirements of most law firms are such that the real risk of a solicitor delaying settlements must be highly doubtful.

The alignment of incentives and behaviours in this area can be counter-intuitive (see, for example, the excellent article on estate agency fees in Freakonomics by Levitt and Dubner). It will be interesting to see how the Justice Committee responds to these concerns and whether the interests of the most injured pursuers can be protected.

The bill provides in s 6 that damages paid by periodical payments are excluded from DBA calculations, and creates a power for the court to approve future loss awards of more than £1 million which are paid as a lump sum. That respectfully appears an unnecessarily complex way of dealing with a problem which would not exist if future losses were simply excluded, leaving solicitors to seek an additional fee from the defenders, as they do now.

QOCS: a further qualification

Part 2 of the bill introduces qualified one-way costs shifting, or QOCS. The reader is referred to my March 2017 article for a discussion of some of the pros and cons of this proposal, and the fact that it is made in isolation from other connected issues such as regulation of claims management companies, and referral fees.

Interestingly, the bill contains a provision which addresses some of the concerns previously articulated. Section 10 provides that an award of expenses may be made against “another person” (i.e. not a party to the proceedings) who provides “financial assistance” to the pursuer and “has a financial interest in respect of the outcome of the proceedings”. The phrase “financial assistance” is not defined, but is likely to include, for example, payment of disbursements, or a DBA.

In any event, where an accident management company, or indeed a solicitor, operates under a DBA, they clearly have a “financial interest in respect of the outcome of the proceedings” and would seem to be caught by this provision. Thus a solicitor or an accident management company may have an award of expenses made against them, without the protection of QOCS. Indeed the financial memorandum states, in its commentary on s 10: “this would include success fee arrangements provided by claims management companies”. While many defenders have the benefit of insurance, many pursuers have the benefit of a claims management company or other well-funded entity standing behind them.

The proposed s 10, I suggest, looks past the “David v Goliath” shibboleth to the truth: that many claims, particularly injury claims, are in fact “Goliath v Goliath”. This section is, however, lacking in some clarity, not least because “financial interest” is not defined. Further detail would be welcome.

Responses needed

Repeated throughout the financial memorandum is the comment that QOCS “might lead to an increase in the number of personal injury claims”, but that it is “not possible to quantify the cost”. Given that QOCS was introduced south of the border very recently, albeit as part of a more balanced package of reform, it is disappointing that further analysis has not been carried out. It does not take an actuary to work out that, absent the risk of an adverse award of expenses being made, in an environment where judicial expenses remain disproportionately high (especially for low value claims) and referral fees are paid, the incentive to litigate is increased. I would suggest that we will, undoubtedly, see a significant increase in the number of personal injury claims. The question, which is not addressed by the drafters, is whether those new claims are meritorious.

The impact of the bill will be very significant. I would encourage all court practitioners to make themselves familiar with the bill and consider submitting evidence to the Justice Committee. Submissions are due by 18 August 2017.

Andrew Lothian is partner and head of the Casualty & General Insurance team in Scotland with DWF LLP